Financial Reform Bill Will Not Stop the Next Meltdown

The much awaited financial reform bill was finished up in an overnight marathon House and Senate committee session last week. Now, the full Congress will most likely pass the final bill and send it to the President. This bill came about as a result of the near collapse of the financial system brought about by reckless bankers with little oversight and regulation.

Some of the bill’s highlights, according to published reports, include: A provision called the Volcker Rule was supposed to ban banks from investing with hedge funds and private equity funds. Back in the 2008 financial meltdown, the Fed bailed out hedge funds and private equity firms because they were in business with the banks. Their losses could have caused major banks to become insolvent. The Volcker Rule was watered down in the bill so banks can still invest there but with a little less money.

The more than $600 trillion derivatives market was supposed to get some tough regulation and force banks to spin off risky trading operations. Loopholes were created for the banks so they can keep trading those profitable but risky securities. There are some new restrictions, but in the grand scheme of things, it’s not nearly enough. (Some say the real value of the derivatives market is more than a $1,000 trillion.)

The rating agencies that gave top grades to toxic debt dodged a bullet. The new bill makes it harder for investors to sue the bond rating companies for losses. Also, not much will get done until after a two year study on the rating agencies is done by regulators. These folks vouched for trillions of dollars of insolvent junk that was supposed to be equal to the “risk free” return of treasuries. Those wildly optimistic ratings helped cause the financial crisis, and nothing is going to be done for two years? In my view, this is simply outrageous and borders on a criminal cover-up.